Borrowing money is a sensitive topic for many people. Most people take on debt, but only a few consumers want to talk about it. When you rack up a lot of debt, your finances are at risk.
Make sure you research first before taking on more debt. If you are thinking about borrowing money, read this list of do’s and Don’ts first.
Do’s of Taking on Debt
#1. Do Compare Shops Before Borrowing
Don’t borrow money from the first lender you find. It is important to look at a loan that suits all your requirements and has monthly payments you can afford.
If you are not happy with what lending companies are offering, it is advisable to take the time to improve your credit score first. Then you can try again later.
#2. Do Save Money While Repaying Your Loan
Many consumers don’t know if they should save or not while paying off their debts. The short answer is yes. It will take several years before you can get out of debt and you might not have enough time to establish a savings account if you wait until you are free of your financial obligations.
You should also have an emergency fund so that you don’t need to borrow more money in case of unexpected expenses. The fund should be enough to cover three to six months of expenses. While you can save less than that amount, it is better to have more money stored in case of emergency.
There’s no cookie-cutter way of saving. It requires strict adherence to a budget. Just make sure that the budget is flexible enough to adapt to your financial situation.
#3. Do Have the Right Reason to Apply for a Loan
Another thing to keep in mind is to have a valid reason for taking on more debt. It is not free money and you will probably pay for it in the next couple of months, depending on its terms.
#4. Do Consider If You Can Afford the Payments
Borrowing money is a financial decision that you should think twice about or even more. You should not do it simply because you want to or you qualify for one. You should consider whether you can afford the payments or not. If you don’t know where to get the fund to repay the loan in full, then don’t apply for one.
Make sure you pay on time as well. While there are instances in which you can’t avoid being late with paying your bills, just make sure that you prioritize your debt payments. You can skip your cable or phone bills, but not your loans.
#5. Do Monitor Your Debts
It is important that you keep track of all your financial obligations. You must know when to pay when you accrued the expense, and how much the remaining balance is.
You should list the details in a notebook or in your phone. Set a reminder for the payments in your calendar so that you will not forget to pay them on time.
#6. Do Know the Terms of the Loan
Before signing a contract for taking on new debt, make sure you read it and understand the terms. Find out how much you need to pay and whether it is in installments or a lump sum. You should also look at the interest rate.
It is important that you have a copy of the contract before you agree to the terms. That way you know what you are getting yourself into. It also protects your rights as a consumer. If you can’t understand all the pages of the contract, employ a lawyer or an accountant.
Don’ts of Taking on Debt
#1. Don’t Just Compare Interest Rates
Some consumers compare only the interest rates offered to them by the lending company. This is wrong because you should consider other factors as well. You should look at the prepayment penalties, insurance, and other additional expenses.
Some lenders offer insurance policies that can roll into the loan. This is bad because it increases the interest rate on the amount you borrowed from them.
Look at all the fees connected with the loan. The interest rate might be pegged at six percent, but it has additional fees that will make it more expensive than one with eight percent interest.
#2. Don’t Be a Victim of Bad Loans
Borrowing can be a good solution to financial problems. However, make sure you are getting a good deal out of it. A bad financial product can make your situation worse instead of providing relief from your problems.
Avoid debts with short terms and high-interest rates. They cost more than what you originally borrowed. If you think that the terms are too good to be true, you better trust your gut about it.
#3. Don’t Borrow When You are Still Paying for other Debts
You might think that getting a loan is the best way to solve a short-term problem, but you are just adding to it. Instead of borrowing more money, the best way to tackle a problem is to find other methods to make your finances better. You will just be earning money to pay off all your debts if you take on too many at a time.
#4. Don’t Use Debt to Fund Daily Life
Living off debt is the worst financial mistake you can make. It will be difficult to enjoy life when you have financial obligations all time. Borrowing money to survive is not the way to live life. Make sure to avoid the never-ending debt cycle as much as possible.
Use these tips the next time you are thinking of borrowing money. Following them will help you in making smart decisions about debts and other financial aspects.